Letter: 1789 and 2008-2012

Posted: Thursday, Dec 6th, 2012

Financial analysts are deeply divided about the future of the U.S. economy and stock market. The optimists, for three reasons, think we are on the cusp of the greatest boom in our history. First, because of weak loan demand, the $81 billion the Federal Reserve is creating every month has nowhere to go but the stock market, which will soar to undreamed of heights. Second, they think a bottoming of the housing market will support consumption and stocks. Third, and most important, the U.S. has uncovered at least 20 oil shale patches that each can produce more oil and gas—and much more cheaply—than Saudi Arabia. Everyone agrees that in two years the U.S. will be the world’s energy capital.

The pessimists make one main argument: the dollars the Fed is creating in unheard of volumes must inevitably cause inflation, which will force the Fed to raise interest rates. That will crimp loan demand and spending, but its most serious effect will be to raise the rates the Federal Government must pay on its huge borrowings. If rates go back to their normal 5 percent to 6 percent, the government will have to spend more than half its revenues on interest. The dollar will drop like a rock and wipe out the middle class.

A few analysts are on both sides of this divide, trying to figure out which of the two scenarios will play out first.

I side with the pessimists because I believed from its start that the 2008 crash was more a problem of culture than economics. It concerns how we order our lives together. This view receives powerful support from Alexis de Tocqueville’s book The Crisis of the Old Regime and the French Revolution. Tocqueville is famous for his classic work Democracy in America, but this smaller book also exhibits all of his powers. The parallels it suggests for what is happening in our times are uncanny. For example:

• Tocqueville shows that something like the Revolution had become inevitable, but it still caught even the most astute totally by surprise—exactly like 2008.

• The Revolution happened in the sphere—politics—that was then Western civilization’s organizing principle, and its consequences disqualified politics for that role. The crash of 2008 occurred in the sphere that had replaced politics, namely economics, and whether the aftermath will disqualify economics for that cultural role (a change almost unimaginable for people of today) remains to be seen.

• Even after the Revolution was well along, perceptive observers thought France would soon revert to pre-revolution “normality.” The features that distinguished it from any that preceded it went unnoticed, and it was dismissed as a transient phenomenon. Similarly, the crash of 2008 is pooh-poohed as but a more extreme example of the familiar business cycle, and the economy will soon return to its normal condition. Only a few yet sense that the world economy is so unbalanced that it cannot right itself by any known means.

• Only let the Estates-General function and all abuses would be easily removed. Yes, sweeping reforms were necessary but there would be no difficulty in putting them through. Only gradually was the Revolution revealed as a grim, terrific force of nature that would spill over the borders of France. Today, only let Congress act reasonably on the fiscal cliff and the crisis will be defanged. That the federal government is still increasing its liabilities by $5 trillion a year is irrelevant.

• Even though the masses would be swept away and trampled underfoot by the Revolution, they along with the intellectuals rallied most enthusiastically to it. Just as it ostensibly championed the commoner against the aristocrat, today Leviathan claims to champion the average person against the plutocrats. Yet the average person, not the plutocrats, will pay the bills.

• Among the passions inflamed by the Revolution, the first to be kindled and the last to be extinguished was its anti-religious animus. Yet this aspect was not basic to the Revolution, itself a new form of religion. The Church was attacked not as a religious faith but as a political force. The Church today is attacked mainly as a cultural institution, but the new order still requires some sort of faith to justify the rights it proclaims. It is only trying to reinvent God in its own image.

• Its champions recognized from the start that the Revolution would be more favorable to centralized monarchical tyranny than the old order ever was. Similarly, the advocates of a new order see that it will entrench Capitalists more firmly than ever in a closer union between political power and Big Money. One analyst predicts that we are going into a Capitalist Socialism in which the rich reap profits while everyone else takes losses.

• The French aristocracy, bourgeoisie, and peasantry at first freely mingled, but over the centuries they drew apart until they could offer no common resistance to the Revolution’s drastic events. Just so, in the early U.S., as in England, the classes freely mixed, but the notorious researcher Charles Murray has shown that the rich have retreated into a few elite zip codes where they are oblivious even to the shrinking middle class, not to mention the poor. If unrest breaks out, government, meeting as little opposition as support, could divide and conquer.

• “Beneath the seeming chaos was developing a vast highly centralized power which attracted to itself and welded into an organic whole all the elements of authority and influence that hitherto had been dispersed among a crowd of lesser uncoordinated powers.” Today, local institutions and autonomy are being buried under metastasizing and multiplying federal bureaucracies seeking to control every aspect of life.